Market Place; Options Soar With Surge In Stocks

By SETH FAISON Jr.

Published: January 13, 1992

Options, the financial instruments that feed on Wall Street excitement, are booming. Volatility in the stock market is always good for the options business, and the surge in stock prices in recent weeks has been steep enough to make options traders smile broadly.

The daily volume of options contracts traded on the nation's five options exchanges has begun to pierce the one million level regularly, and the daily average so far this month, 980,000, is the highest monthly rate in a year. It is also one of the highest monthly levels since the options market peaked -- and crashed -- in 1987.

In contrast to last year's war-inspired spurt, traders say, the current options rush is based on speculation that the stock market is just beginning an extended move upward, and it is attracting investors who want to multiply their profits from rising stocks. Outside the exchanges, in over-the-counter trading that is hard to measure accurately, options business is also up sharply. Profitable More Quickly

"The market has now stopped its daily leapfrogging, but we're still seeing a lot of orders coming in," said Michael T. Bickford, manager of the options department at Kidder, Peabody.

"Very active, very active,"Harrison Roth, senior options strategist at Cowen & Company, said in the laconic voice of a busy Wall Street analyst.

Trading volume is only one measure of activity, but exchange officials say the dollar value of options bought and sold and the number of contracts outstanding are up, too. The reason, for anyone with a calculator, is obvious: rising stock prices make options profitable more quickly while at the same time providing the opportunity to create new contracts.

In a bull market, more options can turn to gold, and the odds are greater that an investor can pick ones that do. As any options trader knows, an investor need pay only a small amount of cash for a stock option, which is the right -- but not an obligation -- to buy or sell a stock by a particular time at a particular price, also known as the strike price. A call option rises in value if the underlying stock goes up; a put option gains if the stock declines.

Mr. Roth cited a simple example: On Dec. 27, when U.S. Surgical was selling for $109.50 a share, a call option set to expire in late January cost only $2. By Jan. 9, when the stock had soared to $131.00, up 20 percent, the option was selling for $17, up 750 percent. A $2,000 investment on Dec. 27, if sold on Jan. 9, would have returned $17,000. The option, with a $115 strike price, dropped to $12.50 by Friday's close, as the stock drifted to $127.

"This is what we call intelligent speculation," Mr. Roth said.

Of course, if U.S. Surgical shares had failed to rise, the option would have fallen in value and have been worthless by the expiration date.

But for the uninitiated, the real danger in this market lies with investors who dare to "write" an option, guaranteeing to buy or sell an underlying stock at a preset price, especially in cases in which they do not already own the stock. For them, a sharp, unexpected swing in the market can be disastrous.

Take, for example, an investor who chose to write $2,000 worth of call options on U.S. Surgical on Dec. 27 -- expecting the stock to fall -- for an easy initial profit of $2,000. The investor would have to come up with 1,000 shares of the stock. If the investor did not previously own the shares, by Jan. 9 the cost would have been $131,000; after the investor sold the shares for $115,000, the net loss would be $14,000.

Many investors use options in complex arrangements, typically to hedge against sudden swings in the market. But the current surge has been characterized by the buying of options on specific stocks, reversing, at least temporarily, a trend of recent years toward buying options on stock indexes, like the Standard & Poor's index of 100 stocks.

Where stock options and index options have traded at about equal volume over the last year, options on individual stocks have outpaced index options by about 6 to 4 since the last week in December, according to figures compiled by the Options Clearing Corporation in Chicago.

Many of those options are straightforward call orders on a specific stock, said Joseph Stefanelli, senior vice-president of the American Stock Exchange.

"There are always more bullish investors than bearish," he declared. "It's not American to be bearish."

The options boom comes at a time of general expansion in the industry. The number of options issues traded on American exchanges has grown to 914 from 789 a year ago. Mr. Roth said most of the new issues had joined because the Securities and Exchange Commission eased the listing standards for options, effective Oct. 21.

For an option on a stock to be listed on an exchange, the required minimum number of shareholders in the stock is now 2,000, instead of 6,000, and the minimum closing market price in the stock over the last three months is $7.50, instead of $10.

At the same time, the S.E.C. has phased out rules over the last year that had limited particular stock options to a listing on a single exchange. Multiple listings, exchange officials said, spurred competition between the trading posts, making them more efficient.

Mr. Bickford noted that trading volume in 1991 was well below the 1987 levels, in part because the market traded at a relatively narrow range for most of the year. In October 1987, when the stock market crashed, some investors who had been writing put options -- betting that prices would not fall -- were wiped out. Many others, who had been purchasing call options, lost all they had invested. The popularity of the options market declined markedly.

The five exchanges that handle options are the Chicago Board Options Exchange and the American, Pacific, Philadelphia and New York Stock Exchanges. But a large segment of the options business is not traded in the standardized setting of the exchanges, but over-the-counter, typically in larger quantities and dollar values.

The new year is normally a busy time for traders who shape such large, customized options deals, because money managers are eager to lock in yearly gains and reposition their portfolios for the new year. Add to that a soaring market, and you get a recipe for a lot of business.

"It's been crazy active," said Lisa Polsky, managing director of global markets at Bankers Trust. "It was the busiest holiday period we've had in a long time."

Despite the spurt in activity, the options business is likely to remain hampered by what traders call misperceptions and lack of understanding.

"Options are still largely misunderstood by just about everyone," Mr. Bickford said. "Even our sales forces don't understand them as well as they ought to."

Graph: "A Boom in Options Trading" shows average daily trading volume of options, 1987-1991, and the trading volume during the last two weeks in millions. (Source: Options Clearing Corporation) (pg. D6)